It’s usually apparent when a business is in financial trouble, headed for a shutdown, or lining up for a merger. And most have an exit strategy of some sort in mind from the first few hours they’re formed; there will eventually be an end, and hopefully it’ll be a profitable one.
Then there is the not-for-profit sector, where it can be nearly impossible to discern whether an organization has outlived its purpose or is not effectively fulfilling its mission. Because they’re not expected to earn a financial return for those who invest in them, nonprofits can continue to raise money but under-deliver results for years, if not decades.
And even when a nonprofit is losing money, there’s often an unwillingness to think about shutting it down for a variety of reasons.
For example: The nonprofit’s strong sense of mission means that shutting down can feel like abandoning an important, unmet societal need or leaving vulnerable clients without services.
Board members may find it difficult to candidly confront dynamic nonprofit leaders, particularly founders. Funding often continues even when organizations are limping; many donors don’t want to be perceived as the one that delivered a death blow by withholding funding.
With the maturation of the nonprofit sector and the proliferation of nonprofit organizations, it’s time to develop a stronger set of standards and practices for when it’s time to shut down, merge, or otherwise stop operating. We need three things:
A nonprofit going through stagnation and decline is often preoccupied with developing programs solely in response to the availability of funding. Such new programs include as little innovation as possible, as leadership thinks that sticking to their guns is the more successful route. Cash reserves are depleted and payables are aging. The organization may delay payment of payroll taxes—or not pay them at all; it might issue payroll checks while asking employees to “hold them” until sufficient cash is available. Program participants or audiences may be shrinking as attempts to recruit new ones fail. A dynamic founder may be unwilling to face the necessity of succession planning.
When nonprofit organizations stagnate and decline, and when boards and leaders are courageous enough to talk about it, the first impulse is usually to try to turn them around. But they also need to think about whether they have the skill sets, resources, and capacity to achieve a successful turnaround or whether they should pursue other options.
In her landmark book Nonprofit Lifecycles, retired CliftonLarsonAllen Principal Susan Stevens describes five conditions for a successful nonprofit turnaround. If these conditions don’t exist, closing may be the best option. For a successful turnaround, a nonprofit needs:
Boards and leaders ought to talk honestly about their prospects for a turnaround and whether the wherewithal exists for success. If the conditions don’t exist, an organization should be willing to shut down in a thoughtful and orderly way. These discussions should be transparent to the organization’s primary investors, whether they’re individual donors, foundations, or other funding sources.
Shutting down any organization is a time-consuming and expensive operation, and this applies to nonprofits as well. Federal and state laws define the tax and legal framework for the disposition of assets, which are considered public, not private. Staff often must be retained through the shut-down period to complete legal and regulatory processes. An organization’s revenue may all but disappear once the shutdown is announced, leaving it with even less operating cash to complete this work.
What if our community’s professional grantmakers developed programs that acknowledged the steps for shutting down and helped pay for them? I’m imagining a staged grantmaking program that helps organizations assess their future, come to terms with the decision to end their existence, and shut down or merge. These sorts of programs exist on the front end—that is, for starting organizations—and to build organizational capacity. But we don’t have a parallel system of support for the end of organizational life.
Gayle Ober, now executive director of the George Family Foundation, was the executive director of the Dale Warland Singers when Warland and the board reached the decision to close in 2004. Ober says that shutting down involved extensive paperwork and interaction with the state attorney general’s office. Further, as a grantmaker, it was important to her to “take care that things end well, that it’s orderly, and that something is left behind.” The organization received targeted funding for the process from its most loyal funders. Ober thinks that grantmakers are more willing to talk about this than was once the case, citing a Greater Twin Cities’ United Way’s recent report on nonprofit mergers as evidence.
Nonprofit organizations are repositories of information about the community and the era in which they worked. They may hold artistic assets like historic costumes, handwritten musical scores, or letters to and from well-known artists. They may document the civic involvement of community leaders as board members and volunteers. They may document ways of working in the social services that will be of interest to future historians. Working with the Minnesota Historical Society, the University of Minnesota, and other archiving institutions, we should find ways to preserve our community’s nonprofit history for future study.
Life implies death, and the same is true for organizations and businesses. When we view the cycle of life as a natural process, we can make preparations for all of life’s stages, from birth to grave. “Death with dignity” would be a great new nonprofit movement. If you’re a nonprofit board member, volunteer, or funder, be willing to talk about it.
Sarah Lutman is a St. Paul–based independent consultant and writer for clients in the cultural, media, and philanthropic sectors.